Microsoft Should Buy Palm, Not Yahoo!

Farhad Manjoo has a bit of very well reasoned advice for Microsoft today in his column on Slate: forget about Yahoo!, and buy Palm instead. That advice makes a lot of sense. Though Microsoft generally denies any current interest in pursuing a purchase of Yahoo!, rumors of some sort of whole or partial takeover seem to crop up every couple of months. But Microsoft is a software company, not an advertising company, so purchasing Yahoo! doesn’t make much sense.

Even at the greatly reduced price (versus last March when they first made their buyout offer) that Yahoo! would now be able to command, Microsoft buying Yahoo! won’t do much to help the company compete with Google. As Manjoo points out, Microsoft’s bread and butter is software sales, and specifically, corporate software sales. Google isn’t going to beat them any soon time there, and purchasing Yahoo! isn’t going to help them either.

“It’s true that companies are increasingly replacing their desktop software with Internet apps—but many still want to pay for the stuff they’re using,” writes Manjoo. So getting into the business of selling ads won’t help Microsoft compete. Unless you think that the “the economic future of software depends on advertising rather than paying customers,” then there’s no reason to think that free software like Google’s web apps will noticeably hurt Microsoft. “That’s a foolish bet — and buying Yahoo will only magnify the foolishness,” he writes.

What they need to do, rather, is get with the times. Microsoft’s issues of late have been miscalculations in the direction of personal computing, according to Manjoo, and not an inability to compete in the areas of web advertising and search.

Microsoft, for example, didn’t anticipate the popularity of low-cost netbooks becoming such an important part of the personal computer landscape. Their current latest generation operating system, Windows Vista, doesn’t run well on those underpowered netbooks, and as a result many of them ship with either an earlier version of Windows (XP) or Linux. Further, the Redmond, Washington-based software giant has also been slow to offer the software as a service applications that many of their customers want.

The next big shift in computing is probably going to be mobile — it’s already happening. In America, on an average day greater than half of all adults use cell phones for at least one non-voice data purpose. And in Japan, there are already as many mobile web users as there are people who access the Internet via a traditional computer.

Manjoo thus suggests that Microsoft should skip buying Yahoo!, and instead buy Palm, which closed trading today with a market cap just over $850 million — meaning it could be had at a fraction of the cost of Yahoo! Palm just unveiled a smartphone at this year’s CES conference called the Pre that from all outward appearances seems to be the best non-Apple analog to the iPhone to date. Or in other words: Palm might be sitting on the first phone that could truly be worth of the title “iPhone killer.” Palm has gorgeous hardware and software, but they lack marketing muscle, and their exclusive partner for the phone — Sprint — is a third place carrier in the US that has been hemorrhaging subscribers.

Microsoft could snap up Palm and do what it does best: license the software to corporate partners and flood the market with viable iPhone alternatives. With recent talk of netbooks and other web-connected devices running Google’s Android mobile OS platform, and the iPhone steadily chipping away at the smartphone market, an acquisition of Palm could ensure that Microsoft doesn’t miss the next wave of computing. Of course, it would also mean turning their back on Windows Mobile, which might be a hard pill to swallow for Microsoft.

But Manjoo ends his Slate piece with some numbers that convince me that whether or not buying Palm makes sense for Microsoft, focusing on software instead of web advertising definitely makes sense: “In 2009, companies are expected to spend about $45 billion on Internet ads. The market for software is nearly 10 times that size—around $388 billion this year. If you were Microsoft, which would you choose?”

Josh Catone joined Mashable in May 2009 and is Executive Director of Editorial Projects. Before joining Mashable, Josh was the Lead Writer at ReadWriteWeb, the Lead Blogger at SitePoint, and the Community Evangelist at DandyID.